Seminars & webinars
18 February, 2021

Online seminar | The welfare cost of ignoring the beta


Where: online
Location:

GoToWebinar

Event's Timetable:

February 18, 2021 - h 4:00 PM

Information:

To participate please register here

Speaker:

Prof. Christian Gollier 
Toulouse School of Economics

introduced by

Prof. Sergio Vergalli
Fondazione Eni Enrico Mattei, University of Brescia, IAERE


Abstract

Modern investment theory recommends the use of project-specific risk-adjusted discount rates for investment and policy evaluations. Financial markets tell us that these risk adjustments have been large over the last century. But in reality, many public and private institutions and people use a discount rate that is not sensitive to the risk profile of their investment projects. This maybe due to limited financial literacy, to the continued misuse of the Arrow-Lind theorem or to the WACC fallacy. Prof. Gollier shows in this paper that the economic consequences of the implied misallocation of capital is catastrophic for the economy. The welfare loss of using a single discount rate is equivalent to a permanent reduction in consumption that lies somewhere between 15% and 45%, depending upon which discount rate is used. This suggests in particular that governments should reform their discounting system for policy and investment evaluation to align it with what asset pricing theory has been advocating for half a century now.

Online seminar | The welfare cost of ignoring the beta

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